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These questions and answers regarding the Institute’s Limitation of Liability Scheme/s are a general guide only. They are not intended as professional advice, and you should rely on your own inquiries and assessment and other suitably qualified and specific professional advice.
The Institute expressly disclaims all liability for any loss or damage arising from reliance upon any information in these questions and answers.
Do I still need PI cover when the schemes have commenced?
What level of PI cover do I require to get the benefit of the cap?
What is the minimum level of PI cover needed?
What level of PI cover do I need if I have a higher engagement fee?
What is an ‘engagement fee’?
Can I reduce the amount of my PI cover to the minimum level when the scheme commences?
Does it matter whether I have costs-inclusive or costs-in-addition cover?
Do the Institute’s PI requirements for the Scheme apply to each CPP holder or the firm?
The caps have changed from those in the NSW Scheme. Once the new NSW scheme commences, which cap on liability will apply, the cap at the time the act or omission occurred (if prior to the new scheme) or the cap at the time the claim is made.
1. Do I still need PI cover when the schemes have commenced?
Yes. A central objective of Professional Standards Legislation (PSL) is to protect consumers by ensuring that the professionals who have the benefit of the cap on liability carry adequate PI cover. Therefore, the cap on occupational liability will only be available to members to whom the scheme applies if they can satisfy the court that they have PI cover to the level of the limitation amount or monetary ceiling which is set out in the scheme.
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2. What level of PI cover do I require to get the benefit of the cap?
Under PSL, damages will only be limited where the court is satisfied that:- you have the benefit of an insurance policy, and/or business assets,
- which provide cover for the services which are at the source of the claim
- where the amount payable is not less than the limitation amount set out in the scheme.
The Institute’s Regulation 7PI.3.5 requires members holding a CPP to carry PI cover of not less than the limitation amount or monetary ceiling in the Institute scheme current at the time of PI policy renewal but not less than $500k in a state where there is no scheme in place.
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3. What is the minimum level of PI cover needed?
The minimum level of cover is the level of the minimum cap in the scheme. Where a claim for damages is lower than the minimum cap, the scheme does not operate to limit liability. In the Institute scheme this minimum cap and the minimum level of cover required depend on the level of your highest engagement fee. This minimum level of cover is to increase in stages.
Up to 30 June 2008, where you have no single engagement fee greater than $50k, the minimum level of PI cover will be $500k. The level of damages will not be affected if they are below $500k.
From 1 July 2008 to 30 June 2009 this minimum level of cover will increase to $750k where you have no single engagement fee greater than $75k.
From 1 July 2009 the minimum level of cover will increase and remain at $1m where you have no single engagement fee greater than $100k.
If you are a member to whom the minimum cap applies, the Institute’s regulations require you to obtain the minimum level of cover in the scheme which is current at the time of your next PI policy renewal. Where your policy renewal is not 1 July, you should consider obtaining the level of cover which will apply at the next renewal date. This would address the risk of a claim is being made prior to the next renewal to which the higher minimum cap would apply. If the lower minimum level of cover is held in the period between 1 July and your next PI renewal, and a matter comes before a court in that period in relation to which the capping scheme was intended to apply, the court may consider that your level of PI cover is not adequate and that you do not have access to the cap on liability.
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4. What level of PI cover do I need if I have a higher engagement fee?
If you have an engagement fee higher than the minimum cap, you must hold PI cover of 10 times that fee (the Limitation amount) up to a Monetary ceiling (depending on the type of service provided) to be able to satisfy the court that you hold adequate insurance.
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5. What is an ‘engagement fee’?
The legislation specifies that the court will decide whether the fee charged (and therefore the level of PI cover held and the cap on liability) is based on a ‘reasonable charge for the services provided’. The legislation requires the court to have regard to any amount actually charged and to the amount that a competent person of the same qualifications and experience as the participant would be likely to charge in the same circumstances in deciding if a charge is reasonable.
The schemes have not yet been tested in the courts so we do not know exactly how the court will make this decision. However, it is likely that the terms of a member’s engagement letter would be an important circumstance to which the court would have regard in determining what was a reasonable charge for the services provided.
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6. Can I reduce the amount of my PI cover to the minimum level when the scheme commences?
Other issues should be considered before reducing your level of PI cover.
The scheme only limits occupational liability for services provided when the scheme is in force i.e. after the commencement date.
When arranging PI cover you should consider that a claim arising from services provided in the previous seven years could be made against you and that where these services were provided before the scheme commencement date, liability will not be limited under the Institute scheme.
The impact of the statutory limitation period should be considered throughout the operation of the scheme as the court must be satisfied at the date when hearing a claim that the level of PI cover which applied at the time when the act or omission occurred is at least equal to the limitation amount.
This should be considered where fee levels fluctuate significantly from year to year. Despite any subsequent reduction in relevant fee level, you must be in a position to satisfy the court that your PI cover is adequate to meet a higher limitation amount (based on the fee for service) in the event of a claim. This higher level of PI cover would be required for the 7 years subsequent to any year in which a higher level of fees has been earned
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7. Does it matter whether I have costs-inclusive or costs-in-addition cover?
Costs-in-addition cover provides for payment of legal and other defence costs in addition to the nominated level of cover in the PI policy. Costs-in-addition cover is preferred to satisfy the court that the full amount of cover, to the limitation amount in the scheme, is available for payment of damages. There is no prohibition in the PSL on a participating member holding costs-inclusive cover. However, it will be difficult to satisfy the court that the PI cover held is at least equal to the limitation amount where defence costs are to be deducted from the overall level of cover, as is the case with costs-inclusive cover. If costs-inclusive cover is held it would be necessary to obtain a higher level of cover than the limitation amount, and to factor in an appropriate margin to allow for adequate defence costs in the overall level of cover.
Regulation 7PI3.5 provides that where costs-in-addition cover is not in place, costs inclusive cover must be for an indemnity limit not less than 25% greater than the amount otherwise required.
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8. Do the Institute’s PI requirements for the Scheme apply to each CPP holder or the firm?
The Institute imposes an obligation on every CPP holder to ensure that the practice has PI insurance to a level and standard set out in Regulation 7PI. PI cover to the level required in the regulations does not need to be held by each CPP holder in the practice.
The Institute’s Regulation 7PI.2 states that:
'each Member must have, or must ensure that each Practice has, a valid and binding contract of professional indemnity insurance which complies with the minimum requirements set out in Regulation 7PI.3. The insurance may have cover greater than those requirements.'
Member is defined in 7PI.1 as a CPP holder or affiliate or practice entity member.
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9. The caps have changed from those in the NSW Scheme. Once the new NSW scheme commences, which cap on liability will apply, the cap at the time the act or omission occurred (if prior to the new scheme) or the cap at the time the claim is made.
The PSL provides that a scheme limits liability in respect of acts or omissions occurring during the period when the scheme is in force. The applicable cap is that in force at the time of the act or omission.
So if the act or omission occurred prior to the commencement of the new scheme, it will not be covered by the new scheme, but by the old NSW scheme.
You should be aware that if the member no longer holds PI cover to the relevant limitation amount relating to the claim then he/she will not benefit from the cap.
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Last Update: 10 March 2008 |
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